25/05/2022
Welcome to another edition of the monthly snapshot. This month we’re looking at the Queen’s speech, some developments around the sector and have a new feature: ‘FAQs’.
Consumer Regulation Review Tracker
Last month we reported on the recently published draft clauses for the Social Housing Regulation Bill which you can read about here. Since then we’ve seen one key update - the Queen’s Speech (more on that below) has formally announced that the Bill will be published during this Parliamentary session. The Bill, as expected, will increase the rights of tenants to better homes and at the same time enhance tenants’ ability to hold their landlords to account. The Regulator of Social Housing will received enhanced powers, including to inspect properties and to monitor and regulate the consumer standards in the same way as the economic standards.
Queen’s Speech 2022: Corporate Implications
On 10 May 2022, the Queen delivered a speech setting out the government’s proposed legislation for the current parliamentary session. Below is a list of the bills announced together with a short summary of each:
Economic Crime and Corporate Transparency Bill
This will broaden the powers of Companies House, including by granting new powers to check, remove or decline information submitted to the Companies Register, introducing identity verification for people who manage, own and control companies and other registered entities, providing Companies House with more investigation and enforcement powers and strengthening transparency requirements for limited partnerships.
Financial Services and Markets Bill
This Bill is intended to revoke retained EU law on financial services, instead replacing it with a UK approach. The proposed Bill will also amend the objectives of regulators to put a greater focus on growth and international competitiveness and will reform the rules regulating UK capital markets to promote investment in the UK. We will be keeping a close eye when the bill is published in particular to see whether any relevant proposals have been made which may affect consumer credit authorisations or the issuing of public bonds.
Modern Slavery Bill
This Bill will mandate areas to be covered in modern slavery statements and will require them to be published on a government-run registry. It is proposed that civil penalties will be introduced for non-compliance.
Audit Reform Bill
This Bill will establish a new statutory regulator, the Audit, Reporting and Governance Authority, and will give the new regulator powers to enforce directors' financial reporting duties and supervise corporate reporting.
Duties of Charity Trustees in the Modern Context of Climate Change
In a recent High Court case (Butler-Sloss and others v Charity Commission for England and Wales and another [2022] EWHC 974), the Court made a declaration permitting charity trustees to adopt an investment policy that aligned their charities' investments with their charitable purposes, prioritising climate change outcomes, even though it risked reducing financial returns.
The claimants were charity trustees of the Ashden Trust and the Mark Leonard Trust. The main charitable purposes of the two charities were environmental protection and improvement, and the relief of poverty. The charity trustees wished to adopt an investment policy that would exclude, as far as practicably possible, investments that did not align with the 2016 Paris Agreement under the UN Framework Convention on Climate Change (UNFCCC). However, they were concerned that adopting such an investment policy might not be lawful and consistent with their duties, as it would exclude many potential investments and reduce financial returns for their respective charities.
The claimants therefore sought approval from the High Court to adopt the proposed responsible investment approach.
The High Court made a declaration that the trustees of the charities were permitted to adopt the proposed investment policy. The claimants had exercised their powers of investment properly and lawfully, having taken account of all relevant factors and not considered irrelevant factors. The decisions to adopt the proposed investment policies were also found to be sufficiently momentous to justify the court approving those decisions.
This case has helpfully clarified the law on charity trustees' duties when exercising investment powers in the modern context of climate change.
Misapplication of Funds by Charity Trustees
The Charity Commission has secured a settlement to recover funds from a married couple who profited personally from payments made to companies connected to the couple by a charity of which they were both charity trustees.
In an inquiry, the Commission found that:
- The couple had received unauthorised financial benefits in the region of £1 million. This was as a result of significant breaches of trust by failing to manage conflicts of interest in respect of payments made by the charity to the companies connected to the couple.
- One of the ex-trustees from the couple had applied to register the charity with the intention of extracting funds from it. However, the Commission had advised that it was unacceptable for him and his wife receive a salary from the charity and to act as charity trustees at the same time. The couple then successfully registered the charity with two other charity trustees, on the basis that they would not be paid. However, the charity was registered with the Commission's model governing document amended to remove restrictions on payments to connected parties. This modification was not drawn to the Commission's attention at registration.
- The charity had raised over £6 million via scratch-card lotteries run by an external lottery manager. However, only £300,000 or 5% of this was applied for the charity's purposes and approximately £4.2 million or 70% was paid to the external lottery manager for their services.
The result of this is that the couple can no longer act as a trustee of a charity –one has been permanently removed as a trustee and the other has signed a voluntary undertaking not to act as a charity trustee again. They also settled a claim to recover the misapplied charity funds and the charity is in the process of being wound up.
On the back of this dispute, the Commission has warned charity trustees that where arrangements are in place with professional fundraisers and commercial participators, a failure to ensure that these arrangements comply with applicable rules will generally amount to misconduct and mismanagement of the charity’s affairs. It has also advised charity trustees to take professional advice on proposed contracts with commercial organisations and be satisfied that the terms are in the best interests of the charity.
FAQs: Board Meetings
Welcome to out new monthly addition to the Snapshot where we will spotlight some of the more common topics that you have been asking us for us to advise on. We have recently been receiving a number of queries in relation to board meetings and whether these need to be in-person or not – particularly in relation to subsidiary companies within larger structures.
Do we need to hold a board meeting?
There is no obligation in company or society law for boards to hold meetings. But most companies and societies do hold meetings as a matter of good governance and as required under their constitutions (the NHF Model Rules set out the number of times a board should meet each year). For commercial subsidiaries we see a variety of approaches, and what is most appropriate will depend on the role of the entity. Generally as a minimum we would expect any organisation to hold at least one meeting a year - after all, it is difficult to demonstrate compliance with directors’ duties if the directors don’t actually meet.
Can we continue to hold virtual board meetings?
Whether you can hold virtual (or hybrid) board meetings will depend on whether or not your constitution permits (or expressly prohibits) holding meetings in this way – most constitutions do allow this but it is always worth checking if you haven’t already (particularly if an entity has a particularly old constitution). The NHF’s current model rules allow for virtual board meetings (but they are currently silent on virtual shareholder meetings). During the pandemic, many companies and societies relied on the provisions of the Corporate Insolvency and Governance Act 2020 to hold meetings (both at board and shareholder level) virtually, but these provisions of the Act are no longer in force and can no longer be relied on.
For those of you that have adopted the NHF Code of Governance 2020 (the Code), meetings must be “fully inclusive and accessible, with adjustments made as necessary so that all members are able to attend and participate”.
How best should I deal with managing approvals outside of the normal meeting cycle?
There are a number of options available where boards need to make decisions outside of their usual meeting cycle. Virtual meetings are a popular way to more easily get the views of the board where required. Companies and societies can usually make use of the written resolution procedures, provisions for which are prescribed under articles and rules. Constitutions should be checked closely to determine how board members can approve these resolutions.
Another option where you are looking at a specific transaction will be to form a working group or committee that can meet more often, and then report back to the board. The terms of reference for such groups should be formulated carefully, provisions within your constitution should be checked around the composition of such groups and their ability to incur expenditure. If it relates to a treasury or finance transaction, then these are very likely to need sign-off from your lenders’ advisers.
Finally, many groups will also have some form of dealing with urgent decisions which can later be ratified by the board, but you should be cautious about using this and it should certainly be the exception rather than the rule. The Regulator of Social Housing has raised concerns in the past where organisations utilise such procedures, particularly in complex or high risk transactions which should have been subject to scrutiny by the board.
Regulatory Upgrades
Our monthly review of regulatory upgrades/downgrades/regrades in the sector has highlighted the following themes:
- Governance upgrade resulting from:
- strengthening governance arrangements
- establishing a new simplified group structure that aligns with refocused corporate objectives (see our ‘fit for purpose structures’ webinar series which touches on some ways to achieve this!)
- putting in place a new risk and internal controls framework which enhanced the board’s oversight and control of key risks.
- Breaches of the consumer standards resulting from:
- not having effective controls in place in relation to fire safety responsibilities
- not having evidence of monitoring of remedial works in relation to electrical, asbestos and water safety
- we have noticed that there have been a number of regulatory notices published recently in relation to the consumer standards, particularly from Local Authorities. We will continue to keep an eye on this.
AOB
Committee Chair’s Network
Our next virtual networking session will be held on Tuesday 7 June at 12.00-1.00pm and will look at the role of the committee chair in times of organisational distress. For further information please contact us.
NHF Governance Conference
Join Sarah Greenhalgh and Diarmaid O’Sullivan at the NHF Governance Conference on Thursday 23 July in London. Sarah will be presenting alongside Abi Jacobs from L&Q and Kelsey Walker from Savills on alternative funding models and governance at 2.20pm
CIH Housing 2022 Conference
Our housing practice colleagues will be attending the CIH Housing 2022 Conference during 28-30 June in Manchester, where Louise Leaver – Head of Housing will be presenting on Securing the funding to make net-zero a reality on Tuesday 28 June, 11.30-12.20pm.